Opinion
No. M-255.
May 29, 1933.
Claude M. Houchins, of Washington, D.C. (John E. Walker, of Washington, D.C., on the brief), for plaintiff.
George H. Foster and W.W. Scott, both of Washington, D.C., for the United States.
Before BOOTH, Chief Justice, and LITTLETON, WHALEY, WILLIAMS, and GREEN, Judges.
Action by the White Motor Company against the United States.
Judgment for plaintiff.
Plaintiff sues to recover $158,464.97, being the total of the excise tax paid monthly from May, 1925, to May, 1928, inclusive, on conditional sales of automobiles with respect to which the sales price had not been fully paid on the dates when section 600(2) of the Revenue Act of 1924 ( 26 USCA § 881 note), was repealed by the Revenue Act of 1926 and section 600(1) of the Revenue Act of 1926 ( 26 USCA § 881 note), was repealed May 29, 1928 (Revenue Act 1928, § 421 [ 45 Stat. 865]).
There is no controversy as to the computation of the amount refundable if plaintiff is otherwise entitled to recover.
Plaintiff contends that the tax at the rates imposed by section 600(2) of the Revenue Act of 1924 and section 600(1) of the Revenue Act of 1926 did not attach for the reason that the sales were conditional, title being retained in the seller and payment of the sales price not having been made at the time the rates of tax imposed by these sections were repealed.
Plaintiff was affiliated under the Revenue Acts with the two corporations through stock ownership. The first affiliated corporation was a selling company and sold the automobiles manufactured by plaintiff. The second was a securities corporation which took over, by assignment from the selling company, the conditional sales contracts with respect to automobiles sold under certain terms and conditions specified in a written contract between the manufacturing and the selling companies and the securities company.
The defendant contends, first, that no refund can be allowed, inasmuch as the transaction whereby the title passed from the manufacturing to the selling company marked the incidence of the tax to be measured by the price obtained at the sale by the selling company; second, that, if this did not mark the incidence of the tax, then the transfer by assignment of the conditional sales contract by the manufacturing company and the selling company, jointly, to the securities company, marked the incidence of the tax; that, since both of these events took place before the repeal or change of the rate of tax, the tax sought to be recovered was properly due and paid, and the Commissioner of Internal Revenue reached the correct result in rejecting the claim for refund. Counsel for the defendant also contends that the regulations of the Treasury Department in force from the beginning of the excise taxes on October 3, 1917, which have provided that conditional sales are not taxable until title passes upon final payment, should not be followed.
Special Findings of Fact.
1. Plaintiff, an Ohio corporation, prior to and at all times involved herein, was engaged in the business of manufacturing and selling automobile truck chassis and bodies, automobile wagon chassis and bodies, and other automobile chassis and bodies, hereinafter sometimes referred to as its manufactured product. During the taxable periods May, 1925, to May, 1928, inclusive, the plaintiff, pursuant to a contract attached to the petition as Exhibit A and made a part hereof by reference, sold to the White Company, a wholly owned subsidiary corporation of plaintiff with which it was affiliated within the meaning of section 240 of the Revenue Acts of 1924 and 1926 ( 26 USCA § 993 and note), all of its manufactured products at prices less than the fair market price obtainable therefor, on the sale of which by the White Company, subsidiary, the tax involved in this suit was computed and exacted from plaintiff based on the price at which such products were so sold by the White Company; and the White Company sold certain of the manufactured products under conditional sales contracts. The tax exacted upon certain of such conditional sales gives rise to the claim involved in this case. A typical copy of the conditional sales contracts made on each sale by the White Company between it and the purchaser, together with schedule of payments and other terms and instructions, is attached to the petition as Exhibit B, and is made a part of this finding by reference. Under these conditional sales contracts a small cash payment of the total sales price was made on or before delivery of the article, and, in some cases, a credit was allowed for an article traded in, and the balance of the purchase price was paid in equal monthly installments with interest. Title to the article sold was, in each case, retained by the selling company, and did not pass to the purchaser until the total purchase price, with interest and all charges for repairs, supplies, parts, and storage on the properties up to the time the contract terminated, were fully paid in conformity with the terms and conditions of such conditional sales contracts.
2. Under the provisions of sections 600(1) and 600(2) of the Revenue Acts of 1924 and 1926, a tax was assessed against and collected from plaintiff, the manufacturing corporation, on a price at which its manufacturing products were sold by the White Company, a subsidiary of plaintiff and affiliated with it within the meaning of section 240 of the Revenue Acts of 1924 and 1926, to dealers or ultimate consumers under conditional sales contracts.
During the period from May 1, 1925, to February 26, 1926, inclusive, the date on which section 600(1) of the Revenue Act of 1924 ( 26 USCA § 881 note) was repealed (Revenue Act 1926, § 1200 [ 44 Stat. 125]), conditional sales were made and conditional sales contracts were executed covering products described as taxable at 3 percent under section 600(1) of the Revenue Act of 1924 in the total amount of $3,811,892, on which payments had not been completed on February 26, 1926, and title to the products had not passed to the purchaser from the White Company. On these conditional sales, aggregating the amount stated, the collector demanded and collected from plaintiff the tax of 3 per cent. prescribed by section 600(1) of the 1924 act aggregating $114,359.96.
During the period January 1 to March 28, 1926, the date on which section 600(2) of the Revenue Act of 1924 was amended by sections 600(1) and 1200 of the Revenue Act of 1926 (see 26 USCA § 881 note), conditional sales were made and conditional sales contracts were executed covering products described as taxable under section 600(2) aforesaid in the total amount of $948,545.50 on which payments had not been completed and title to the products had not passed from the White Company to the purchaser on March 28, 1926. On the total of these conditional sales the collector demanded and collected from plaintiff the tax prescribed by section 600(2) of the Revenue Act of 1924 in the aggregate amount of $47,427.28; of this amount plaintiff admits a liability for $28,456.37.
During the period March 29, 1926, to May 28, 1928, conditional sales were made and conditional sales contracts were executed covering products described as taxable under section 600(1) of the Revenue Act of 1926 in a total amount of $837,803.33 on which payments had not been completed and title to the products had not passed from the White Company to the purchaser on May 29, 1928. On the total of such conditional sales the collector demanded and collected from plaintiff the tax imposed by section 600(1) of the Revenue Act of 1926 ( 26 USCA § 881 note) in the aggregate amount of $25,134.10.
3. The aforesaid total tax of $215,377.71 collected by the collector was by him paid into the Treasury of the United States. Of this total plaintiff claims that $158,464.97 was erroneously and illegally collected on the ground that the conditional sales, on which the purchase price had not been paid by the purchaser on the dates on which the sections imposing a tax upon sales of automobiles were repealed, or the rate reduced, were not taxable.
A computation of the tax claimed to be refundable in this action which was paid by plaintiff to the collector in the amount of $158,464.97, together with the monthly payments aggregating that amount, is correctly set forth in paragraph 4 of the plaintiff's petition herein which is incorporated in this finding by reference.
4. November 15, 1924, which was prior to the date of the conditional sales involved herein, the plaintiff, the White Motor Company, and its wholly owned subsidiary, the White Company, entered into a written agreement with the White Motor Securities Corporation, which was and is a wholly owned subsidiary of the plaintiff, the White Motor Company, and affiliated with it and the White Company within the meaning of section 240 of the Revenue Acts of 1924 and 1926. This agreement is incorporated in the stipulation of facts and is made a part of this finding by reference. It provided that the White Motor Securities Corporation, hereinafter referred to as the "securities corporation," was organized for the purpose of financing the deferred payments under the conditional sales contracts entered into by the White Company; that the conditional sales contracts reserving title in the White Company were security for the notes covering the deferred payments and entitled the holder thereof to repossess the motor trucks and busses covered thereby in case of default; that the plaintiff and the White Company assigned to the securities corporation the aforesaid notes and conditional sales contracts at 97 per cent. of the unpaid deferred payments thereunder; that where the notes so transferred bore interest only from maturity, the plaintiff and the White Company were charged interest by the securities corporation at the rate of 6½ per cent. per annum from January 1, 1925; that in case plaintiff and the White Company transferred to the securities corporation each year less than $10,000,000 of notes, they were to pay to the securities corporation a sum equal to the difference between 3 per cent. of the notes actually delivered and 3 per cent. on the total amount of $10,000,000; that the securities corporation was required to make collections of the deferred installment payments on the notes and to notify the plaintiff and the White Company of any payments ten days in default; that plaintiff and the White Company were required to repurchase from the securities corporation any and all of the notes thirty days in default, and were also to take over from it any and all trucks and busses which it repossessed at a cost to it incident to such repossession; that the securities corporation was required to sell to plaintiff and the White Company any and all notes thirty days in default, and to turn over to them all trucks and busses repossessed by it at cost of repossession; that the Securities Corporation was required to notify plaintiff and the White Company before it commenced proceedings to repossess any of the motor trucks and busses; that settlement of all amounts due from and to each of the parties to the contract of November 15, 1924, was to be made semimonthly; that the contract should cover a period of five years from its date; and that, upon termination thereof, plaintiff and the White Company were obligated to repurchase from the securities corporation at face value, plus accrued interest, all notes obtained by it under the agreement which it might have on hand at that time.
All the conditional sales contracts involved in this case and referred to in the tabulation set forth in paragraph 4 of the petition, hereinbefore mentioned in these findings, were assigned by the White Company to the White Motor Securities Corporation in accordance with the aforesaid agreement of November 15, 1924, and such assignment constituted a part of each and every conditional sales contract with the purchaser from the White Company, as follows: "All the right, title, and interest of The White Company in and to the within conditional-sale contract and the property covered thereby has been sold, assigned, and transferred by said The White Company to The White Motor Securities Corporation by contract dated the 15th day of November 1924."
5. Plaintiff duly filed proper claims for refund of the tax herein sought to be recovered which were disallowed by the Commissioner of Internal Revenue on the ground that the assignment of the conditional sales contracts under the terms of the contract of November 15, 1924, by plaintiff, the manufacturer, and its subsidiary, the White Company, constituted a sale to the White Motor Securities Corporation of the conditional sales contracts of the trucks or manufactured products covered thereby taxable to the plaintiff.
This suit is for the recovery of a portion of the manufacturers' excise tax collected for the period May, 1925, to May, 1928. The amount of $158,464.97 sued for represents (1) the amount paid on conditional sales of automobiles of $3,811,892 at 3 per cent. for the period May, 1925, to March, 1926, under section 600(1) of the Revenue Act of 1924 ( 26 USCA § 881 note) with respect to which conditional sales the purchase price of each automobile had not been fully paid at or prior to the time that section of the revenue act was repealed; (2) the difference between the tax paid on conditional sales of $948,545.50 at 5 per cent. under section 600(2) of the 1924 act ( 26 USCA § 881 note) and 3 per cent. thereof imposed under section 600(1) of the 1926 act ( 26 USCA § 881 note) for the period January to March, 1926, not fully paid at or prior to the time section 600(2) of the 1924 act was repealed and section 600(1) of the 1926 act became effective; and (3) the tax paid on conditional sales of $837,803.33 for the period March 29, 1926, to May 29, 1928, not fully paid at or prior to the time section 600(1) of the 1926 act was repealed.
Section 601 of the Revenue Act of 1924, re-enacted without change as section 601 of the Revenue Act of 1926 ( 26 USCA § 883) provides that:
"(a) If any person who manufactures, produces, or imports any article enumerated in section 881 [600] of this title, sells or leases such article to a corporation affiliated with such person within the meaning of section 993 [240 of this act], at less than the fair market price obtainable therefor, the tax thereon shall be computed on the basis of the price at which such article is sold or leased by such affiliated corporation.
"(b) If any such person sells or leases such article whether through any agreement, arrangement, or understanding, or otherwise, at less than the fair market price obtainable therefor, either (1) in such manner as directly or indirectly to benefit such person or any person directly or indirectly interested in the business of such person, or (2) with intent to cause such benefit, the amount for which such article is sold or leased shall be taken to be the amount which would have been received from the sale or lease of such article if sold or leased at the fair market price."
The regulations promulgated by the Treasury Department from the beginning of the excise taxes under the Act of October 3, 1917 ( 40 Stat. 300), have provided that conditional sales are not taxable until final payment and title passes. We have held in People's Outfitting Co. v. United States, 58 F.2d 847, 74 Ct. Cl. 419, that these regulations were valid and in accordance with law. If any doubt existed as to whether the regulations were in the beginning strictly in accordance with the statute, their continuance, without change, and the long-continued practice of departmental construction of the statute, which has been re-enacted many times without change, would be sufficient to overcome any attack upon their validity. Brewster v. Gage, 280 U.S. 327, 50 S. Ct. 115, 74 L. Ed. 457; Universal Battery Co. v. United States, 281 U.S. 580, 50 S. Ct. 422, 74 L. Ed. 1051; Fawcus Machine Co. v. United States, 282 U.S. 375, 51 S. Ct. 144, 75 L. Ed. 397.
The pertinent provisions of arts. 7 and 8, regs. 47, promulgated under the Revenue Acts of 1924 and 1926 are as follows:
"The tax is to be paid by the manufacturer on all sales made directly by him or through the agent. * * *
"Where a so-called sales agent or distributor is a separate corporation and the sale to it is absolute and at prices and under terms and conditions such as ordinarily obtain between persons dealing at arms length with no further payment or benefit accruing to the manufacturer upon resale or otherwise except the receipt of dividends on stock holdings, the taxable sale is that made by the manufacturer to such sales corporation even though all or substantially all of the stock of such sales corporation is held by or for the benefit of the manufacturer or the stockholders in the manufacturing corporation. Where, however, there are special arrangements between the manufacturer and the selling corporation such as special terms, prices, etc., the taxable sale is the sale by the selling corporation as the selling agent of the manufacturer. The same rule applies in the case of the selling corporation which owns substantially all the stock of a manufacturing corporation."
Article 25, regs. 47, under the 1924 act, and art. 15, regs. 47, under the 1926 act, provide that: "If a manufacturer sells a taxable article to a subsidiary corporation at less than the fair market value thereof, the tax shall be based on the selling price of the subsidiary corporation."
Article 9, regs. 47, under the 1924 act, and art. 8, regs. 47, under the 1926 act, provide so far as material here that: "The tax attaches when the title to an article passes from the manufacturer to the purchaser pursuant to a contract of sale. * * * In the case of a conditional sale, where title is reserved in the vendor until payment of the purchase price in full, the tax attaches (a) upon such payment, or (b) when title passes if before completion of the payments, or (c) when, before completion of the payments, the dealer disposes of the sale by charging off by any method of accounting he may adopt the unpaid portion of the contract price, or (d) when the vendor discounts the notes of the purchaser for cash or otherwise, or (e) when the vendor transfers to another his title in the article sold."
We, therefore, hold that, under the statute and the regulations promulgated pursuant to the authority thereof, "the taxable sale is the sale by the selling corporation as the selling agent of the manufacturer"; that "the tax is based upon the selling price of the subsidiary corporation" and that "the tax attaches when the title to an article passes from the manufacturer to the purchaser pursuant to a contract of sale."
The automobiles, the tax upon the sale of which is involved in this case, were billed by the plaintiff, the White Motor Company, to its subsidiary, the White Company, as a branch office and at branch office prices, which were less than the fair market price obtainable therefor by plaintiff, and the plaintiff agreed to indemnify its selling agent, the White Company, and save it harmless from any or all losses of any nature whatsoever incurred by it through sale of plaintiff's output. In view of these circumstances and the provisions of the statute and the regulations, the shipping of the cars to the White Company and the billing of the same to that company by the plaintiff at branch office prices, was no sale at all within the contemplation of the statute, and did not, we think, mark the incidence of the tax to be measured by the price obtained by the White Company if it should sell the cars. There can be only one taxable sale and the statute and the regulations fixed the sale by the affiliated corporation, or selling agent, as the taxable sale by the manufacturer. This view is consistent with the decision in the case of Indian Motorcycle Co. v. United States, 283 U.S. 570, 574, 51 S. Ct. 601, 75 L. Ed. 1277.
The next question is whether the assignment by plaintiff and its subsidiary, the White Company, of the conditional sales contracts and notes to the White Motor Securities Corporation, another subsidiary, constituted a sale to the securities corporation of the conditional sales contracts and notes, and the motor trucks and busses covered thereby, so as to cause the conditional sales of automobiles by the White Company to be taxable at the time they were made. We are of opinion that the assignment of the contracts, notes, trucks, and busses to the securities corporation was not a sale thereof by plaintiff and the White Company within the meaning of the statute and the regulations. The White Company and plaintiff were parties of the first part to the contract of November 15, 1924, for the reason that the White Company held title to the trucks and busses sold by it as plaintiff's selling agent. They assigned the notes and conditional sales contract to the securities corporation pursuant to contract. We are of opinion that the transactions were not sales, but were loans secured by paper transferred as collateral. Commercial Security Co. v. Holcombe (C.C.A.) 262 F. 657, 661. This seems obvious from the number of attendant circumstances, among which were the payment of interest by plaintiff, its right and duty to repurchase notes in default, notice to it of default in payments on the notes, collections by the securities corporation, notice to plaintiff before repossessing trucks and busses, notice to plaintiff before commencing proceedings to repossess trucks and busses, the right and duty of plaintiff to take over all trucks and busses repossessed, its right to any profit on the resale thereof, and its right and duty to repurchase all paper at the termination of the contract in 1929.
The absolute property in the conditional sales contracts — the notes of the purchasers, and the trucks and busses covered thereby — was not transferred to the securities corporation, since it only acquired the right to have or to take from the proceeds of the notes the amount it had advanced thereon, and the burdens and benefits of ownership remained fixed in plaintiff, inasmuch as it was plaintiff's right and duty to repurchase all defaulted paper and take over all trucks and busses repossessed by the securities corporation. Plaintiff also retained dominion over and a property interest in the property, and in all cases and in every respect was entitled to any profits derived from repossession of trucks and busses, and, conversely, it was required to bear the losses incident to the repossession and any default on any of the notes.
It is our opinion that the transaction between plaintiff, the White Company, and its subsidiary, the securities corporation, constituted a loan of money by the latter rather than the sale by the former of the notes, conditional sales contract, the trucks and busses covered thereby. Brierley et al. v. Commercial Credit Co. (D.C.) 43 F.2d 724; Merchants' Transfer Storage Co. v. Rafferty (C.C.A.) 48 F.2d 540. The assignment under the agreement of November 15, 1924, was made a part of each conditional sales contract and was notice to any holder of the notes for the purchase price of the automobile that the assignment was governed by that agreement.
We think articles 8 and 9, regs. 47, promulgated under the acts of 1924 and 1926, apply only in cases where the discounting of notes passes all right, title, and interest of the vendor to the vendee and cannot be applied in a case where, pursuant to a contract made a part of each assignment, the vendor retains the burdens and benefits incident to ownership of the articles sold. The statute and the regulations must be held to contemplate a sale in which all right, title, and interest in the property follow the title from the vendor to the vendee.
Plaintiff was, therefore, liable only for the tax imposed by the act in force at the time the final payment was made upon the conditional sales involved, and it is entitled to recover $158,464.97 with interest, representing the difference between such tax and the tax collected at a higher rate under a prior act which was repealed or the rate reduced before the sale became taxable.
It is so ordered.
BOOTH, Chief Justice, did not hear this case on account of illness, and took no part in its decision.